Think retiring rich is out of reach for most people? Think again. With a little planning and self-discipline, you could be rich before you know it.
Follow these golden rules and watch your nest egg grow:
Rule 1: Spend less than you earn
The formula for retiring rich starts with putting money in the bank. Social Security benefits alone won’t be enough to live the good life during your golden years.
Money Talks News founder Stacy Johnson recommends spending only 90 percent of the money you make and socking away the remaining 10 percent.
If you have zero savings right now, concentrate on building up an emergency fund in a savings account first. Once your rainy-day fund is full, put that 10 percent you’re not spending into a dedicated retirement fund.
Rule 2: Start saving early
Thanks to the power of compounding interest, a little money saved now can go a long way at retirement time. But to get the most benefit, you’ll want to start saving as early as possible.
Let’s say you’re 20 years old and can manage to put away only $100 a month into your retirement fund. Assuming you average 8 percent investment returns, you’ll have more than $500,000 by age 65. Even better, over that 45-year period, you’ll only have invested $54,000 of your money to get all that cash in return.
If you wait until you’re 40 to start saving $100 a month, you’ll put in $30,000 of your money and rack up close to $100,000 by age 65 at an 8 percent annual investment return.
Rule 3: Make up for lost time
Maybe you’ve reached age 55 and think you’ve missed your window of opportunity to retire rich. Don’t raise the white flag just yet!
The government allows those 50 or older at the end of the year to make catch-up contributions to their retirement funds. You can contribute an extra $6,000 to your workplace retirement program, such as a 401(k), for a total annual contribution of $25,000. IRA catch-up contributions are $1,000 for a total allowable contribution of $7,000 each year.
You might think there’s no way you would ever have $7,000, let alone $25,000, to invest in a single year. However, you might be surprised at when and how you come into extra cash.
For example, you may benefit from a loved one’s estate, downsize your home or sell your boat or other large toy that no longer fits your lifestyle. When you find yourself on the receiving end of such a windfall, don’t blow it on a vacation. Instead, put it in a retirement account if you want to retire rich.
Rule 4: Don’t leave free money on the table
If someone tried to hand you $100, would you say no?
That’s exactly what you’re doing when you fail to take advantage of a 401(k) employer match. Your company is basically giving you free money with just one string attached — you need to pony up some of your own cash for the retirement fund too.
You won’t get rich by passing up golden opportunities like this for extra cash. If your employer offers a 401(k) match, make sure to take full advantage of it.
Rule 5: Minimize your taxes
The rich stay rich because they’re savvy enough not to let Uncle Sam take too much of their money.
When investing retirement money, use tax-sheltered accounts such as IRAs and 401(k)s whenever possible. In addition, be smart about which type of account you use.
Traditional retirement accounts let you invest money tax-free now and then pay the piper once you make withdrawals in retirement. Meanwhile, Roth IRAs and Roth 401(k) plans tax you now so you can make the withdrawals tax-free.
You’ll probably want to discuss with a financial adviser the best option for your situation. However, as a general rule, Roth accounts are preferable for younger investors. In theory, you should be making more money when you’re 65 than when you’re 25. As a result, your tax rate now may be lower than the rate you’ll pay in retirement.
However, if you’re within a few years of retirement and making a higher salary, you may want to consider a traditional account to get the tax benefits now.
Rule 6: Take a little risk
You could put all your money in bonds and sleep well at night knowing you’ll probably never lose any of your money. But with that approach, you’re not going to retire a millionaire.
Stocks and real estate are where the money is to be made, but they come with the risk of a housing bubble bursting or the stock market crashing. Take heart, though, in knowing that stocks and real estate have historically appreciated over the long run.
Rule 7: Stay informed about your investments
Don’t mistake taking a risk with being dumb.
A smart risk may be investing in an emerging market fund. A dumb move may be pouring your life savings into a speculative currency.
How do you know the difference? Find out by researching available investments, weighing your options and selecting the amount of risk that works for your unique situation.
For example, those nearing retirement age may want to minimize their level of risk, while recent college grads can be more daring because time is on their side.
Rule 8: Break free from the herd
When the stock market crashed about a decade ago, too many people freaked out and sold their investments.
Those people took a bad situation and made it even worse. Many sold their investments right when the market was bottoming out. They subsequently missed out on one of the greatest bull markets in stock market history when it rebounded.
The people who are going to retire rich are those who snatched up stocks at bargain-basement prices in 2009. Same thing goes with the housing market. When the bubble burst, the smart people were the ones who were buying houses, not selling.
It’s easy — and tempting — to follow the herd. But if you want to be rich, keep a cool head and make rational money decisions even during a crisis.
Rule 9: Work longer
While you can file for Social Security benefits as early as age 62, you’ll get a lot more money each month if you wait until you’re 70.
Once you hit what’s considered your full retirement age, you can get a big bump in your benefits for every year you wait to start receiving payments — but only up to age 70.
You may be worried you’ll have one foot in the grave at age 70, but don’t fret. According to Social Security actuarial data, at age 70, you should still have an average of 14 to 16 years left of life to enjoy.
Rule 10: Maximize your income potential
Finally, if you want to retire rich, maximize your earnings. That means no more settling for a dead-end job that pays pennies.
Look for ways to increase your income so you can boost the amount of money you save for retirement. Consider these options:
Consider credentialing that could help you get a raise or a transfer to a higher-paying position.
Look for a mentor in your workplace who could help advance your career.
Find out if you are eligible for one of the government-funded workforce development training programs.
What’s your saving strategy? Share with us in comments below or on our Facebook page.